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While You Were Working – April 19

Al Gore laughs last on sustainable investing, banks forget the Warren Rule, regulators diss coco bonds, money and guns, and how to lose a half-billion dollar yacht in a divorce.

4 min read

Modern Money

Al Gore

Al Gore, a birther in the sustainable investing movement. (Eric Piermont/Getty Images)

An inconvenient investing truth

Well, well, well … look who is beating most of the competition when it comes to sustainable investing: Al Gore.

Sustainable investing is here to stay – even if the definition of “sustainable” seems a bit shifty. And one of the funny little ironic secrets about sustainable investing is that it stands poised to boom if/when the Trump administration ever launches its infrastructure stimulus. This is because many of the projects being targeted by the White House and both parties on Capitol Hill are not going to be attractive to traditional investors. Expect some of those projects – both infrastructure and the retro-fitting of aged infrastructure – to trickle down to funds focused on sustainable investing.  

When will banks learn the Warren Rule?

Bizarrely, the CFPB yet again stands to be the proving ground for the Warren Rule about how banks’ constant battling to de-fang regulations sometimes proves woefully short-sighted.

The Warren Rule, named after Sen. Elizabeth Warren, was born after the banking lobby worked tirelessly to prevent then-Professor Warren from taking the official helm of the nascent CFPB. Without her dream job atop the Bureau, Warren decided to run for Senate. So instead of being an agency head that could have been woefully underfunded during her tenure and then summarily thrown out with the bath water at the beginning of the Trump administration, Warren became a senator and now sits on the Banking Committee; destined to be a thorn in the side of banks for years to come.

Now that Mick Mulvaney spends part of his time leading the CFPB, the onslaught to weaken the bureau’s reach is at full speed. But that weakening may end up coming at an alarming cost for banks as some regulators at the state level are chomping at the bit to fill the void. Considering how much disdain banks have for having to navigate layers of regulation, I suspect they will rue the day they tempted state regulators to become more proactive.

New York’s attorneys general have always loved making splashy headlines by slapping lawsuits on banks. Do banks really want 25 state AGs to start clamoring for those same headlines. Don’t you think regulators in California would love to take an even bigger whack at Wells Fargo? And if North Carolina ever finally turns fully blue (as demographics suggest it will), what do you think that will mean for that the Tar Heel state’s banking watchdogs and all the banks that love to call Charlotte home?

The lesson behind the Warren Rule is that sometimes the long game is the best game – especially when it means you can box-in your biggest adversaries. Maybe one day the banks will learn.

Memo to the Federal Reserve

This is not what working-class Americans want to hear.

What regulators got wrong about Coco bonds

Contingent convertible (coco) bonds were one of the more creative responses to the financial crisis. The basic premise is that banks would issue bonds that would convert to equity when said banks equity to risk-weighted assets slipped to dangerous levels. A quintessential high-risk, high-reward creation that had the added benefit of acting as a sort of fire sprinkler in case a bank found itself starting to catch on financial fire.

But rather than support coco bonds and the benefits they provide, regulators proceeded to trivialize them by excluding them from capital surcharge calculations and then chucking them into a bucket of various products that can be counted as total loss absorbing capital (TLAC).

For all the lip-service regulators sometimes pay to maintaining financial stability, it might make sense for them to support a product specifically designed to do just that.   

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